Editorial: Reform needs to come before Big Three bailout

Monday

Nov 24, 2008 at 12:01 AMNov 24, 2008 at 3:33 PM

It's easy to sympathize with central Illinois car dealers struggling to sell their product. As a barometer of how the economy is doing, bad news for them is bad news for all of us. Let's hope that turns around, soon.

It's easy to sympathize with central Illinois car dealers struggling to sell their product. As a barometer of how the economy is doing, bad news for them is bad news for all of us. Let's hope that turns around, soon.

That said, we have not been convinced that the $25 billion bailout package proposed by the Big Three of General Motors, Ford and Chrysler is the cure for what ails them. While such help may soothe potential buyers that the manufacturer of their vehicle is going to be around, this rescue as pitched did not address the underlying credit and consumer confidence concerns that underscore the reasons Americans aren't buying cars in sufficient numbers.

Apparently Uncle Sam saw things the same way, as neither a GOP White House nor a Democratic Congress seemed keen on the idea this past week. That doesn't mean this is dead, as Democrats are keeping the door open to doing something in December, while President-elect Barack Obama seems more amenable to providing assistance.

We are of very mixed emotions on this issue.

First, with $700 billion in bailout money out there for the giving, why all the stink over just $25 billion of it? One way or another, taxpayers are going to be on the hook, as Uncle Sam will be there to pick up the tab for auto industry pensions if these companies can't.

Second, if insurance giant AIG is too big to fail as the 35th largest company in the world, then one could certainly make a case that the ninth largest, General Motors, also is (Caterpillar sits at 152nd, by comparison), though the same kind of potential domino effect is not in play. With GM losing $20 billion through the first nine months of this year and erasing $2 billion a month from its reserves, its management may not be bluffing when they say the company is on the verge of collapse. Would the feds again leave Lehman Brothers to dangle if they knew then what they know now about the damaging ripple effects that resulted for the broader economy? Lehman looks like a miscalculation now.

Third, up to 3 million jobs could be at stake if these companies are allowed to fail. With 10 million Americans out of work and the highest unemployment rate in 16 years, well, if you think Wall Street is in a bad way today ...

On the flip side, philosophically this rescue is one tough pill to swallow for many Americans already suffering from bailout fatigue. Whether it's Uncle Sam telling the private sector how to run its business or giving away taxpayer money without strings attached, neither is a particularly attractive scenario.

It would potentially put government in the position of rewarding the wrong kinds of corporate behavior. One example of the latter was the Big Three's previous insistence and shortsightedness - since corrected - in making gas-guzzlers while foreign competitors concentrated on more fuel-efficient models that consumers ultimately came to demand. By definition, these bailouts are unfair to competitors - also with U.S. plants that employ American workers - who made good decisions.

On that same score, the Big Three never got their labor and legacy costs under control, as Caterpillar did 15 years ago when it took the risk of deciding to interrupt the cycle of pattern bargaining in its industry. Those costs go into the price of every car, and competitors such as Toyota and Honda have less of them. Arguably, it's one reason why Peoria is healthier than Detroit is today.

It's also why many analysts believe that any bailout here is really just pouring endless amounts of good money after bad into companies that are inevitably doomed without systemic changes in the way they do business. They point out that bankruptcy reorganization does not necessarily mean extinction, that it will force automakers to confront some of the factors now crippling them.

Essentially, this argument goes, taxpayers cannot afford to make this investment without assurances that the Big Three will reform themselves across the board. Case in point was the admission by the three CEOs who testified before Congress last week that they had traveled to Washington in private jets ... in order to plead for public funds for their beleaguered companies. Suffice it to say, that did not go over well. There seems not to be a Lee Iacocca among them, no chief who by force of personality, charm and decisive action can turn this PR disaster around.

As a result, congressional leaders have rightly asked automakers to produce more specific rebuilding plans. The United Auto Workers needs to be part of that discussion, too. At the very least, they owe Congress the courtesy of explaining how they intend to spend the money. If their position is that they've given all they can give, done all they can do, then any bailout is probably dubious.

Meanwhile, the feds must devise an economic rescue blueprint of their own and stick with it. The uncertainty and unpredictability coming out of Washington is aggravating the gyrations on Wall Street. The time for decisive, consistent leadership is now.